ITC Rules For Capital Goods Under Goods and Services Tax
ITC Rules For Capital Goods Under Goods and Services Tax

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Date: 19 Sep 2022


Input Tax Credit on Capital Goods

There are special rules for calculating input tax credit reversals, input tax credit availability, non-availability, and input tax credit calculations for capital under GST. Additionally, capital goods that are used for both taxable and exempt deliveries are given special consideration. 

What are Capital Goods?

Machines utilised in manufacturing, such as those employed in producing paper, textiles, and grain, will be regarded as capital goods. Capital products are handled differently under the current tax system than consumer goods. Capital assets are not taxable, but the sale of retail goods is.

Input Tax Credit is permitted on capital goods used for production. Capital goods can be distinguished from input goods by examining their disposal. For instance, no additional supply is created when a capital good is sold. When an input good is sold, the supply continues; only the owner changes.

ITC on Capital Goods

For capital goods that are used for business or professionally, an input tax credit for input services is applicable. For instance, if a laptop is used in your workplace for four years and you pay another entity some money during that time (referred to as input service), that money is eligible for the input tax credit. The laptop, a capital asset, is not eligible to be purchased with the claim of ITC. The purchase of capital assets without paying the sales tax is not possible. 

Capital goods are not regarded as supplies and are not subject to taxation at the moment of disposal; only the sale price is taken into account. For instance, if a laptop is sold in the open market after five years of usage, the sale price is taxable, and any input tax credits that were given at the time of purchase but not at the time of sale cannot be utilised.

Capital goods are only operational after an input service has been added to them through installation; they are not used directly in production. For instance, if English software is not installed on a laptop before selling, only the sale price is taxed, and an input tax credit from an earlier period can be claimed.

Additionally, capital goods cannot be employed as supply on their own; they need to be combined with another input service. For instance, if a laptop is sold without the power supply attached, the sale price is subject to tax, and an earlier period's input tax credit applied to the purchase price cannot be reclaimed.

The law does not regard capital goods as either goods or services; hence they are also excluded from transactions considered while calculating ITC. ITC can only be obtained when capital goods are sold; it cannot be used to pay for them.

Conditions for Claiming ITC on Capital Goods

The Conditions for claiming ITC on Capital goods are as follows:

  1. Capital goods should be utilised professionally or in a business.

  2. The sale price is taxable if capital goods are sold; an earlier period's input tax credit cannot be used.

  3. Capital assets are those of the company, not of an employee. This ensures they are solely used for company purposes and do not serve as staff perks.

  4. The earlier period refers to the earlier fiscal year in which the input tax credit for its purchase was received. For instance, if a laptop purchased in 2018-2019 is sold in 2021-2022, the earlier period is 2018-2019, and the input tax credit used to purchase the laptop can be claimed.

  5. When importing capital goods, no earlier period ITC can be claimed; the only time this is permitted is when the imported equipment is resold in India after being made functional with the use of services.

  6. Regardless of whether they are used in the same firm or various enterprises, all capital goods will be regarded as one lot.

  7. Credit received under the Central Sales Tax may also be claimed under the GST. on capital goods utilised to make further supplies.

Types of ITC for Capital Goods

There are three types of ITC for Capital goods. These are:

  1. Capital goods used for personal or exempted sales

  2. Capital goods used for normal taxable sales

  3. Capital goods used partly for personal or exempted sales and partly for normal taxable sales

 

Capital goods used for personal or exempted sales

The input tax credit is not available for personal or exempted sales of capital goods.  For instance, if Mr Kapoor buys a fridge, it is a personal purchase; hence, an ITC cannot be claimed. Similarly, in another instance, if he purchases a small flour mill for his grocery shop, he is producing unbranded flour, which is exempted from GST, and thus he cannot claim an ITC for the same. 

Capital goods used for normal taxable sales

Mr Manoj has purchased machinery for manufacturing shoes, and the GST he pays while buying the machinery will be available to be claimed as ITC since the machinery comes under normal taxable supply. 

Capital goods are used partly for personal or exempted and normal taxable sales.

Capital goods used partly for personal or exempted sales and partly for normal taxable sales are eligible for claiming ITC.

The ITC that is paid for the capital goods is transacted through the e-ledger.  The shelf life of such assets will be marked as five years from the date of purchase. The total amount of input tax transacted to the e-ledger will be distributed over the entire marked shelf life. 

Considering five years as the shelf life and the GST is paid monthly, the following formula can be used to calculate the ITC per month:

ITC per month= Input tax credited to the e-ledger divided by 60 (5x12)

The amount of ITC from common capital credit that can be attributed to exempt supplies is:

Credit attributed to exempted supply= (Value of exempted supplies divided by the total sales) multiplied by Common Credit for a tax period

After subtracting credit for exempt materials, the remaining sum will be eligible for ITC. These calculations should be carried out separately for CGST, SGST, IGST, and UTGST.

What happens if a person uses an asset for taxable and exempt goods?

If a capital asset was previously used for personal intent or for selling things that are exempt and now it will be used for both personal and professional purposes or affecting both exempt and taxable supplies, Input tax that needs to be added to the electronic credit ledger is calculated as follows:

Input tax to be credited= 5% of input tax for every quarter or part from the date of invoice subtracted from the Input tax. 

Cases when ITC will not be applicable on Capital goods

Cases, when ITC will not be applicable on Capital Goods, are: 

A transaction with Consideration: In this case, GST will be due at the corresponding rate, tax invoices must be prepared, and the transaction should be recorded on the GSTR 1 Form.

Transaction without consideration: The same situation as in the previous situation applies here if the supply of goods is unintentionally lost, stolen, destroyed, written off, or otherwise disposed of. In such circumstances, it won't be regarded as the supply of goods, and no GST will be charged.

Reversal of ITC on Capital goods

The following circumstances require that input tax credits obtained on capital items be reversed:

  • When a taxpayer chooses the composition plan for tax payment.

  • When the taxpayer's provided products or services are no longer subject to tax.

  • When capital items are supplied and an input tax credit has been claimed.

  • When a registered taxpayer's registration has been cancelled on a pro-rata basis, the input tax credit associated with the remaining usable life in months will be calculated, assuming the useful life to be five years.

Capital Goods sent on Job Work.

Suppose a capital asset has been given to an employee for use in the course of business. In that case, the major manufacturer may be eligible for an input tax credit if the item is returned within three years of the date it was given to the employee. If the assets are not returned within three years, they will be considered to have been supplied, and tax, as well as interest for late payments of taxes, would be due.

Conclusion

Thus, capital goods that aid a company's expansion are eligible for the input tax credit. ITC contributes to reducing the expense of corporate development, which benefits the economy as a whole.

It can be challenging to comprehend and calculate ITC. Utilising fully automated software that can handle time-consuming tasks on your behalf helps you save time and effort. Busy Accounting Software offers such software, an automated and scalable solution to all the laborious tasks of computing input tax credit, common credit, and other GST-related business. Fill out the form below for a free trial to assist you with a seamless procedure.